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Senator Urges Congress to Keep Sarbanes-Oxley Loan Ban

Describing a ban on corporate loans to top executives as one of the most important reforms effected by the Sarbanes-Oxley Act, Sen. Carl Levin urged Congress to hold firm against continuing pressure to loosen the loan prohibition. Section 402 of the act established, for the first time, a prohibition against publicly traded companies using corporate funds to give personal loans to executive officers and directors.

Sen. Levin, ranking member on the investigations subcommittee, recently delivered his remarks on the Senate floor. Last September, Sen. Levin and Sen. Susan Collins, the chair of the Governmental Affairs Committee, sent a letter to the SEC urging it to resist any attempts to narrow or weaken Section 402's ban on insider loans to allow corporate executives to purchase company stock, exercise stock options, obtain insurance, relocate for work or pay taxes.

Focusing specifically on split-dollar life insurance loans, Sen. Levin said that these loans have become very popular among corporate executives in the last few years. The way they work is that the company obtains the insurance policy for its executive and pays the premiums, while the executive names the policy beneficiaries. The policies are called split-dollar life insurance because, when the policy pays out, the company is reimbursed from the benefits for the cost of the premiums. The remainder of the insurance benefits, often millions of dollars, goes to the named beneficiaries, such as the executive's family. Because the funds are insurance benefits, the payments to the beneficiaries are mostly tax-free.

The result, according to Sen. Levin, is a company-financed loan to the executive to cover the cost of the insurance premiums, enabling executives to afford a generous policy and provide tax-free benefits for their beneficiaries. Since Section 402 has gone into effect, most companies have apparently discontinued providing their executives with split-dollar life insurance loans, and the executives themselves have declined to pay the premiums. The result, noted the senator, has been a dramatic drop in sales of this insurance. He noted, however, that insurance groups have been lobbying the SEC and Congress to create an exception to Section 402 to permit companies to resume providing split-dollar life insurance loans to their executives, but so far they have been unsuccessful in reversing Section 402's ban on this type of corporate loan.

In Sen. Levin's view, Section 402 has put an end to a large set of abuses associated with company loans to executives, including loans issued without interest, loans used to build personal residences, loans used to provide executives' families with tax-free insurance benefits and loans that are never repaid. Company funds belong to shareholders, he emphasized, and are intended to benefit them and the company they own. In the senator's view, they were never intended to act as a pool of funds available to be loaned or given to company executives.